The present invention relates to a data processing system that measures performance in creating and realizing value by a business enterprise based on past and anticipated future events. More particularly, the present invention relates to a data processing system and method that supports the provision of a real time assurance report by a third party on user-selectable real time outcome displays in multiple formats.
A fundamental principle of traditional accounting and financial reporting methods is that the performance of a business enterprise is derived from transactions between the enterprise and other parties, such as customers, suppliers and employees. Consequently, traditional accounting can be characterized as measuring value realized through such transactions. Traditional accounting systems can thus be characterized as transaction-based.
This arrangement proved to be satisfactory through what can be characterized as the manufacturing era. In today's world, however, the most important assets of many enterprises are not plant and equipment but rather knowledge, ideas, and skills. For the most part, knowledge-based assets are not acquired through third-party transactions, but are rather developed in-house. As such, they are not adequately captured by traditional accounting methods.
As a result of these shortcomings of traditional accounting with respect to knowledge intensive companies, it is apparent that capital markets are missing important information needed to rationally assess the performance of a business enterprise. It has been argued that traditional accounting methods are a declining predictor of stock prices and produce largely irrelevant reports for companies with long research and development pipelines. Without adequate accounting for knowledge-intensive enterprises, capital markets will perform sub-optimal resource allocation.
Many recent developments have taken place in the field of accounting and financial reporting though none fully addresses these problems. These include: Economic Value Added (EVA); Balanced Scorecard, Intellectual Capital Management (ICM), Economic Resource Planning (ERP); and the Global Reporting Initiative (GRI). An attempt has been made to mitigate some of traditional accounting's shortcomings with management's discussion and analysis (MD&A) sections in annual reports, but MD&A disclosure is itself in bad condition, with no clear standards, methodology, or reporting principles. Capital markets are not routinely supplied with information that would permit monitoring of strategy implementation, value creation, and risk management.
Thus, with the increased time-lag often found between value creation and value realization, an accounting model that focuses only on the latter is increasingly irrelevant for intensively knowledge-based enterprises—and, indeed, enterprises in general are increasingly knowledge-based. Traditional financial statements have simply not provided sufficient information about knowledge assets.
When value creation was closely followed by value realization (the mouse trap was manufactured in March and sold in April) concentrating on just value realization alone was good enough. It is no longer good enough today. A bio-pharmaceutical research company may spend research and development funds on a potential drug discovery for ten years before successful commercialization and revenue streams commence. The growing deficits resulting from research and development write-offs displayed by traditional accounting during those ten years do not convey timely and relevant information. It is not that traditional accounting methods focussed on value realization should be abandoned. They are important, but they are not sufficient.
An additional drawback to traditional transaction-based accounting techniques is that they tend to rely on summarization of transactional data on a monthly, quarterly, or annual basis in order to provide periodic financial statements and reports. However, what is needed in today's fast-paced environment is a method of providing continuously updated information on value creation and realization.
An additional drawback to traditional accounting techniques is that they tend to capture only one dimension of value: namely, financial value. However, financial value is not the only dimension of value that is relevant to understanding enterprise performance. For example, non-financial factors, such as avoiding harm to the natural environment, or contributing to a healthier community, may not yield direct financial benefits to the enterprise in the short-run, but may be as important in strategic terms as increasing the financial returns to shareholders.
A further drawback to traditional accounting techniques is that they tend to measure performance from the perspective of only one stakeholder: that is, shareholders. However, in the modern economy, achieving a full understanding of enterprise performance requires knowledge of the extent to which the enterprise is meeting the expectations of other stakeholders, such as customers, employees, suppliers, business partners, and the communities and society within which the enterprise operates.
Therefore, what is needed, by contrast to conventional techniques, is a technique for providing value creation information for a business enterprise from the perspectives of a variety of stakeholders, not just shareholders. What is further needed is a method of providing an integrated perspective on both financial and non-financial value creation. What is also needed is a technique for providing measurements of the performance of a business enterprise in creating value based upon projections of future events and related benefits that result from such events. It is to these ends that the present invention is directed.
In addition, there is a need for a technique for providing continuously updated measurements of the performance of a business enterprise in creating and realizing value based on past and future events, and related benefits that will result from such events.
Such an event-based system should be organized on fundamentally different principles than today's transaction-based accounting systems. This creates the prospect that an enterprise that wishes to track value creation performance, as well as traditional value realization performance, would need to maintain two entirely different systems: an event-based value creation performance measurement and reporting system, and a transaction-based value realization accounting system. Maintaining two separate systems can be inefficient and costly.
Thus, a method of adapting a continuously updated event-based system so that is capable of producing traditional accounting reports and financial statements, in addition to measuring and reporting on value creation performance is needed.
Another drawback of traditional accounting is that it provides a general purpose set of value realization financial statements for a particular period of time, in a single format, as specified by Generally Accepted Accounting Principles (GAAP). There is thus a need for a stakeholder-user to be able to select the attributes of a particular outcome display that is updated in real-time.
An important feature of traditional value realization accounting has been the development of standards and procedures that enable an independent third party auditor or independent internal auditor to provide assurance to users of financial statements. Provision of assurance in this way enhances the credibility of financial information and is an important element in the proper functioning of capital markets.
Assurance has traditionally been provided in the form of a standardized audit report, whereby an assurance provider attests to the accuracy of financial or non-financial information based on evidence obtained through an audit conducted in accordance with generally-accepted auditing standards. In the past, it was not necessary to customize an assurance report to the needs of a particular user, since traditionally, audit reports were usually provided on financial statements prepared in a standardized format.
For information produced by a continuously updated data processing system for measuring and reporting on value creation and value realization to be of maximum utility to stakeholders, it is desirable to provide methods by which an assurance report can be provided by third party or independent internal auditors.
There are significant differences between a traditional financial accounting system and a continuously updated data processing system for measuring and reporting on value creation and value realization that have major implications for assurance providers. For example, it is desirable in a continuously updated data processing system for measuring and reporting on value creation and value realization that assurance procedures be automated so that they can be undertaken in real time, in parallel with the generation of the outcome displays on which assurance is being provided. It is also desirable that, where appropriate, stakeholder-users be able to specify the level of assurance they require, and that assurance reports be customized in order to be relevant to the particular outcome display to which they refer, taking into account the choices made by a stakeholder-user in selecting the attributes of a particular outcome display. It is also desirable that certain real time automated procedures and the generation of an assurance report in real-time be performed independently by the third party assurance provider on a parallel system. It is to these and additional ends that the present invention is directed.